BI judgment welcome news for policyholders but result differs by wordings

The Financial Conduct Authority has set out that the court found in favour of its arguments on the “majority of the key issues”. 

However, the Association of British Insurers has countered that “the judgment divides evenly between insurers and policyholders on the main issues”.

With the ruling not saying that all insurers are liable in every instance, all parties involved and wider market commentators are agreed that the complex judgment, which may yet be appealed, will need further consideration.

The judgment by Lord Justice Flaux and Mr Justice Butcher came after the test case brought by the FCA on behalf of SME policyholders considered 21 policy wordings across eight insurers.

The FCA has estimated that 700 types of policies across 60 different insurers and 370,000 policyholders could be affected.

The 21 policy wordings under the microscope fell broadly into three categories, Herbert Smith Freehills, which represented the FCA detailed.

Disease wordings

Disease wordings, written by RSA, Argenta, MS Amlin and QBE, had BI cover linked to a notifiable disease occurring within a specific radius of the policyholder’s premises.

Insurers argued cover was only for a local occurrence but the judges concluded that the outbreak of the disease was the occurrence and that cover was not limited to outbreaks only in the area.

Human infections and contagious diseases, by their nature may spread in a highly complicated and fluid patter, HSF noted.

However, on the QBE2 and QBE3 wordings the court found that the wordings were limited to matters occurring at a particular time, in a particular place and in a particular way.

Prevention of access wordings 

The prevention of access wordings were written by Arch, Ecclesiastical - which has confirmed it does not expect to have to make a payout after the judgment, Hiscox, MS Amlin, RSA and Zurich.

These provided cover for prevention or denial of access to premises due to authority imposed actions caused by an emergency likely to endanger life or property in a specified area.

The court concluded that, generally speaking, these clauses were to be construed more restrictively than the majority of the disease clauses giving narrow localized cover, HSF stated.

However, some insureds may still get cover under some wordings.

Tulsi Naidu, CEO Zurich UK, responded: “Zurich agreed to participate in the FCA’s test case, which tested a wide range of insurer policy wordings, to help provide certainty to policyholders about their business interruption insurance. The court’s decision in respect of the Zurich policy wording has confirmed our interpretation and approach under these policies is correct. We are pleased that Zurich’s participation in the process has helped achieve clarity for policyholders across the UK insurance sector.

Hybrid wordings 

The hybrid wordings which blended the disease and prevention of access wordings were from Hiscox, which has pegged its claims at less than £100m after the ruling, and RSA, which has also put out an estimate of a £104m hit. They insured against losses resulting from an interruption to the business from being unable to use the premises because of imposed restrictions following an occurrence of disease.

The court used its previous approaches accordingly meaning that “close examination of the particular terms of the clause is required to determine policy application”, HSF wrote.

The trends clauses were a critical issue in the case as the arguments put forward by insurers could have lowered payouts.

The court started from the point that the trends clause was intended to put the insured in the same position as if the peril had not happened.

HSF detailed that it offered guidance on the operation of the trends clauses for all three categories with elements stripped out in each counterfactual.

Insurers had used the decision in the Orient Express Hotels case to support their case on causation.

That case involved a hotel that closed for two months in 2005 after being damaged by Hurricane Katrina.

The court dismissed the insurers’ arguments, HSF said, on the basis that Orient Express was not concerned with the same type of perils as the wordings it was looking at.

The court did not rule on where Covid-19 happened in the country, the lawyers pointed out, and if the insured “can discharge the burden of proving that the disease occurred or manifested in a certain area” will been to happen on a case-by-case basis.

“Clearly time will be needed to fully digest the judgment, but next steps for insureds will include considering (a) if any of the findings are directly (or indirectly) applicable to their wording; and (b) what additional issues will need to be considered to establish and prove a valid claim,” HSF concluded.

Insurers have the opportunity to appeal.